What are the key elements of the bill approved by the House Energy and Commerce Committee last Friday?

We have a good understanding of the bill’s four major elements (the official version will be reported out of committee in early June.) These include:

A clean energy requirement, designed both to set new standards for current types of power generation and to accelerate development and deployment of clean energy technologies such as renewables, energy efficiency and carbon capture and storage.

An efficiency requirement that provides funding for energy efficiency programs, and the setting of stronger building codes and product efficiency standards.

A cap and trade program that sets mandatory caps on 87 percent of U.S. greenhouse gas emissions including the electric power and oil and gas sectors, and heavy industry.

Measures designed to ease the transition into a low carbon economy by providing assistance to those impacted by a cap including industry, affected sectors of America’s workforce, and low income households.

What emission reductions would be achieved if this bill was implemented?

Implementation of the cap would reduce emissions from covered sources to 17% below 2005 levels by 2020 and 83 percent below 2005 levels by 2050. Total U.S. greenhouse emissions would be reduced, as a result, by 15% below 2005 levels by 2020. This is slightly more than President Obama’s goal of reducing emissions to 1990 levels by 2020 (approximately 14% below 2005 levels). However, implementing the ACESA would result in significant additional emissions reductions beyond those generated by the pollution cap.

The bill contains substantial complementary requirements including emissions performance standards for uncapped sources and emission reductions from forest preservation overseas. When these are taken into account, GHG emissions would be reduced by 28 percent below 2005 levels by 2020 and 75 percent below 2005 levels by 2050. When additional reductions from requirements related to international offsets - used for compliance with the federal cap and trade regime - are also factored in, potential emission reductions from the bill would be even greater. They could reach up to 33 percent below 2005 levels by 2020 and up to 81 percent below 2005 levels by 2050, depending on the quantity of offsets used.

What assistance would industry and consumers receive to cushion the transition?

Title III of the bill provides details on the distribution of allowances allocated to aid affected industries and consumers through the transition to a clean energy, low carbon economy. Rather than being auctioned to the highest bidder, the lion’s share of allowances are allocated to entities in specific sectors, mostly with strict strings attached. For example, the largest chunk – 35% - is awarded to electric power distributors, with the requirement that the benefit of these allowances must be passed on to consumers to cushion against potential increases in energy bills. Similarly, allowances are also designated for consumers of natural gas, heating oil and propane. States would also receive some allowances to be used for specific purposes such as the deployment of clean energy technologies.

The bill also earmarks a small percentage of allowances to the automobile industry to help re-tool factories to manufacture new, clean vehicles such as plug in hybrids. At least 15% of the allowances would be auctioned, with the proceeds channeled into programs to assist low income energy consumers. Up to 17 percent will be given away for free to petroleum refineries and trade exposed industries to assist them as they adjust to a carbon constrained economy.

What are the bill's offset provisions?

The bill allows for up to 2 billion tonnes of offsets a year, split 50/50 between domestic and international activities. Domestic offsets – generated by unregulated sources of greenhouse gases, not covered by the carbon cap – would mainly come from forestry and agriculture. International offsets would be generated from activities that reduce forest loss, as well as sectoral crediting mechanisms, and other programs. Oversight will lie with the Administrator of the Environmental Protection Agency. Once approved by him or her, these offsets would be traded in domestic and international carbon markets, and purchased by covered sources toward their legal compliance with the emissions cap. (If the Administrator finds that 1 billion domestic offsets may not be available in a given year, the 50/50 split may be adjusted to allow fewer total domestic offsets and more international offsets - up to a 25/75 ratio.)

What happens next?

The American Clean Energy and Security Act faces several more hurdles in the House of Representatives. The bill has been referred to eight House committees with jurisdiction over its subject matter, four of which are waiving jurisdiction. Other committees, including the Natural Resources Committee, the Ways and Means Committee, and the Committee on Agriculture, will debate, and possibly amend, areas of the bill relevant to their jurisdiction. House Speaker Nancy Pelosi has made this bill a priority and been clear that she expects quick consideration in these committees. The bill will then require a vote on the floor of the House of Representatives, probably this summer.

Meanwhile, separate climate legislation is expected to be introduced in the Senate. If passed, this will need to be reconciled with the ACESA. To become law, the joint legislation would then receive a final vote in both chambers, before being sent to the president for signing. This entire process could be completed in 2009 but this is unlikely. The prospects are fair for an approved House bill, complemented by substantial progress in the Senate, when the U.S. attends talks to conclude a post-2012 international climate agreement in Copenhagen in December.